SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. I’m talking today with James Allworth, a regular contributor to HBR. He’s worked at Apple, Booz & Company, and Harvard Business School’s Forum for Growth and Innovation. He’s the co-author, with Clay Christensen and David Skok, of a new Nieman Reports article called “Breaking News– Mastering the Art of Disruptive Innovation in Journalism.” James, thanks so much for talking with us.

JAMES ALLWORTH: Thank you, Sarah, for having me.

SARAH GREEN: James, I think the article is interesting for any journalist or anyone in media, of course, but it’s also interesting, I think, for anyone interested in exploring a living case study of disruption in practice. I think most of our listeners will be somewhat familiar with the theory of disruptive innovation, but just in case they’re not, can you give us an example of where you see this disruption happening in the news?

JAMES ALLWORTH: I think one of the areas that people will see and relate to most easily is in the emergence of online sites such as– Huffington Post is a good example at the moment, and other potential sites. So POLITICO is another really good example. These sites that have been built from scratch, they’ve been built online. They’ve been built to take advantage of all the inherent advantages that the internet offers. And it gives them a distinct edge when they’re competing with their legacy counterparts. They don’t have any elements to their business model that they don’t need. They’ve just built what they required to compete on the web. So yeah, Huffington Post, POLITICO– I think those are two good examples.

SARAH GREEN: So what you’re seeing there is sort of low overhead, really lean, doing something pretty cheaply that’s good enough to compete with something like the Washington Post, say.

JAMES ALLWORTH: And that’s exactly how construction starts off. The theory became famous when Clay Christensen initially started researching it, actually in the field of disk drives. So it’s been applied to the computing industry, to the automotive industry, to numerous different industries. And the process is very similar between different industries. And what happens is you get an incumbent business who is very successful, and in the process of chasing further success they move more and more up-market, listening to their best customers, asking their best customers what they want, invariably creating an even better product.

But what happens is it leaves an opening at the bottom of the market for a new entrant using some kind of scalable advantage– maybe using a new technology or using a new business model to come along and steal the bottom of the market from the incumbent. And as they do that, they gradually get better and better and move further and further up-market until the incumbent is completely squeezed out of the market altogether.

SARAH GREEN: And so what then is the innovator’s dilemma?

JAMES ALLWORTH: Well, the innovator’s dilemma is exactly that process but from the perspective of the incumbent. So let’s take an example from the automotive industry. You’re General Motors, and you’ve be making these cars, and you’ve been doing it really quite well. And the reason that people buy your cars is because your cars are better than the competition. And now, the most attractive cars to keep building are the ones with the highest profit margin. And so you go out to your best customers, the ones that have been buying your most expensive cars, and you ask them what they want. And they say, well, more features, better styling, so on, and so forth. And so you continue to make more of these more expensive cars that have high margins.

The problem with that approach is when you go out and you listen to these high-margin customers, there’s another set of customers that you don’t end up listening to. And those are the ones that can’t afford your product. And so in the instance of General Motors, they were challenged by a disruptive entrant, the Japanese auto manufacturers. Specifically, Toyota is the one that embodied the disruptive entrants, and they came out with a very cheap entry model into the United States when they launched. And like most incumbent businesses, General Motors dismissed these new guys, like they’re making a toy. It’s no threat to our business. These cars are nowhere near as good as what we make.

But to the folks who couldn’t afford a GM car, that little Toyota was a fantastic option. And so Toyota gets a foothold in the market as a result of that, keeps improving their product, and eventually they get to the point where they’re making Lexuses which are challenging the best of what America has to offer. And that’s the process of disruption. The innovator’s dilemma is the process of disruption from the perspective of the incumbent.

SARAH GREEN: So one question about that, that has always perplexed me, is why move up the value chain at all? Why not just stay in the shallow end of the pool with your low overhead, making stuff that’s pretty popular with a segment of the market that’s under-served elsewhere. Why move up that chain and become an incumbent that can then be disrupted by someone else?

JAMES ALLWORTH: That’s a great question, and it’s at the heart of the dilemma. You have to think about it from the perspective of the guys that are running these businesses. So you’re the CEO and you have to report quarterly earnings, and Wall Street wants to see those earnings numbers go up every time. Rarely are you going to be able to come up with a convincing plan to increase earnings, particularly in the short run, by moving down-market. The most reliable way of increasing margins, increasing net profit, is by going to your best customers and working out how you can provide something that’s even better for them. And that focus on moving up, that pressure you get, often driven by financial markets, but also it’s the general pressure that the executives in these businesses feel to keep doing better, to keep going up, to be the best. It ends up being the downfall when it’s the essence of the dilemma. All the right things they do– all the right things. And by doing them so well it ends up leading to their undoing.

SARAH GREEN: So I want to bring this a little bit back to the article on the case study of journalism because what was interesting to me, especially, about this piece is that you walk through several different frameworks and ways of coming up with ideas for generating disruptive innovation ideas. So you can focus on your audience, focus on your customers, ask what job they really want done, and sort of do all this brainstorming. But actually you say at the end of the piece that the toughest part is execution. It’s once you’ve come up with the ideas, it’s then putting them into practice in your organization– especially for a legacy organization that has existing infrastructure, has existing employees who are used to doing things a certain way. Why is the execution challenge so hard and what do you do about it?

JAMES ALLWORTH: Well, if there was an easy answer to this question, I don’t think that most of these legacy organizations would be facing the problems that they are. A big part of the challenge right now is that they’ve effectively left their dash very late. Effectively, what we’re asking these guys to do is build a completely new business. Now one of the secrets to building a new business is it’s best to do it before you need it. If you wait until your platform’s burning and you have to jump, then you’re trying to maintain your core business at the same time while building something new. And that’s very difficult to do.

One of the examples that we give– just in general, from a completely different industry from the news industry– is looking into the department stores. And in the 1960s in the US, I think there was somewhere in the vicinity of 320 traditional department stores. Only one of those survives today in a state that, you know, I think that the executives back in the 1960s would be happy with. And that is actually Dayton Hudson. And the reason is they set up a disruptive business unit by the name of Target. All the others have consolidated down to, I think, about eight of them.

And that in essence is the trick. You’ve got to try and build that new business unit before you need it. If you wait until you need it to start building it, it becomes much more challenging. There are a number of news organizations trying to do it right now. But as in the case in any business, it’s very difficult to just decide you’re going to start out building a new business and flick a switch and make it work. It takes time to experiment, to get the profit in the business model right. And so, yeah, execution is a key part of it. The trouble is it needs runway and my concern for some of these legacy organizations is that they haven’t left themselves a lot of room to do it.

SARAH GREEN: Well, and I think we see, across all walks of human life, that it’s really hard to create that sense of urgency before it’s too late. By the time you really feel a sense of urgency, it’s often too late. But your point about the department stores raises an interesting question for me because Target is hardly Marshall Field’s. It’s not exactly Harrods or some of these other great legacy department stores. And I think that is the challenge that a lot of these news organizations see themselves in, is that they want to do in-depth, investigative reporting that shines a light on corruption or speaks truth to power. But instead, what you see as the sort of way forward– as you mentioned Huffington Post. It’s curation, it’s blogging, it’s not breaking the news.

JAMES ALLWORTH: Right. And I think that’s a good point that you have to understand that if we went back 10 years, and we looked at the newspaper that arrived on our front step on a Saturday morning, there would be a classified section. There would be a huge amount of advertising. There’d be a travel section that would support further advertising. There’d be an automotive section with more advertising.

Now, I accept that most people don’t go to work at the New York Times because of those other sections, but they had built these alternative businesses to support the core. And they supported each other. But like the classifieds, in particular, that declined rapidly since the advent of the internet. Not core in terms of exposing corruption or speaking truth to power and those other things that you mentioned that are really important from a business model perspective.

Now, I think that the newspapers are going to have difficulty in pulling those businesses back. I think Craigslist, for example, is really disruptive to classifieds. EBay has come at it from the other extent when you’re dealing with more valuable items. Craigslist works much better when you’re local. If those have gone away, they’re going to need to find something else to support doing these activities that are a really important function for society. So the Huffington Post, as an example, has found a model generating a lot of paid views, of relying on advertising to be able to support them going in and starting to do the investigative journalism. And recently, and to a lot of people’s surprise, they won a Pulitzer Prize. So it is possible. The journalism is absolutely, critically important. You’re not going to get any argument about that from me. But it is also important to think about, to understand, and to recognize the fact that you can’t do the journalism without the business model to support it because the money for all that has to come from somewhere.

SARAH GREEN: So, in that sense, if I’m a leader of a news organization, I could see going to my staff and making the case that the mission hasn’t changed, but the way we will support the mission needs to change. In that sense, as the leader, you may overcome one of the challenges to execution there, but there will be others. And I think one of the ones that you bring up in the piece is the threat of cannibalization, right? Because there’s always going to be someone who says, oh, but if we do that it will cannibalize its existing business. What do you say in that case to overcome that objection?

JAMES ALLWORTH: Well, if you can see a way of cannibalizing your existing business, then chances are somebody else can see that same opportunity too. And if it’s a choice between you or your competitor cannibalizing that business, I think in almost every instance you will be better off in the long run if you yourself choose to do it. One of the interesting examples in this instance that I often refer to is the example of Apple. The Steve Jobs biography came out earlier this year or late last year, regardless, in it he references Clay’s work on disruption.

And the realization that Jobs had– that if we’re going to make this a successful company, we have to be focused entirely on the products and not worry about the profits. If we get the products right, the profits will take care of themselves. And that meant, for example, that they came out with a product like the iPad which– now before the iPad was released, there’s a pretty solid argument to be made that the iPad was going to cannibalize sales of their portable computers. And similarly, they integrated all the iPod functionality into the iPhone.

Now, the iPod line has, in terms of total revenue generated for Apple, it’s declined as a result of that. But they didn’t let someone within the business say, you know what? I think we’re going to lose some business as a result of this. Or someone who’s the executive in charge of the iPod saying, you guys are going to destroy my business. We can’t let the iPhone do this. The iPhone can do everything that the iPhone does, but we’re not going to put a music player in it because that will kill the iPod. That’s not how they viewed the world. It’s a case of them recognizing that it was all about building the best product. And if that meant that they had to cannibalize existing business plans to do that, that’s fine.

SARAH GREEN: So, James, in the case of journalism, I hear a lot of anxiety from other people in media about, what if these legacy publications go away? What if the New York Times goes away? What if we decide to stop funding public radio? In those cases some of the best sources of news we have currently won’t be operating anymore. Does that means that the media landscape will just entirely be lolcats and memes and people curating other people’s spur-of-the-moment blogs? Or do you think that we can continue to produce quality journalism even in a world without these legacy businesses?

JAMES ALLWORTH: I’m confident that quality journalism will continue to exist. I guess I have two reasons for that. I think there are a lot of people in this space who are very mission-driven. They’re very focused and very passionate about the topics in which they investigate. Not only are they passionate for investigating those topics and writing about them and informing the public, but I’m sure that if those legacy organizations go away that those people will band together. And they will experiment and they will find a way of making it work.

And the second reason, it’s just a function of using history as our guide. TIME magazine– although it’s having it’s difficulties right now, it’s probably going through the throes of disruption– it started out in a very similar fashion to Huffington Post. Back in 1920s, the co-editors of the Yale Daily News decided that they were going to create TIME as an aggregator. And their reason for doing it? Because they thought there was too much news in New York City. Now, it started off life as this cheeky publication that pulled together news articles from existing new sources, and it grew to a publication which in the 1980s people said of it that it could pick presidents. It had, at one stage, 20 million people reading it. And it still has a very storied history. You see that progression, and you look at it through the lens of destruction, I am confident that the organizations that got their start in the internet era– pushing the internet memes, pushing lolcats, and so on– I’m confident that they’re going to move up-market in the same way that the organizations they’re displacing have. And I fear a bright future for journalism given that fact.

SARAH GREEN: Well, James, that’s really interesting stuff. Thanks so much for talking with us today.

JAMES ALLWORTH: Thank you, again, for having me, Sarah. I really appreciate it.

SARAH GREEN: That was James Allworth. You can read more from him on our website, hbr.org. And be sure to check out the full article from Nieman Reports coming out of the Nieman Foundation for Journalism at Harvard University.